Trading Treasuries (nominal and TIPS)

[Tom_T]

Need some help understanding a specific TIPS bond.

Cusip is 912828N71 . YTM 2.612, coupon 0.625, adjusted price 122.560. Maturity 1/15/2026.

If I buy $10,000, it will cost $12,256, correct? Let's say inflation remains constant until maturity. What has my $12K investment given me?

[protagonist]

Yes, nominals would outperform TIPS in deflation because you are guaranteed a positive yield, but the upside is limited in deflation whareas the downside is limitless in inflation.
In my very extreme example above, if you had purchased nominals instead at 5% you would get $525K instead of $500K at the end of the year.... 5 more houses.

I often see posters fretting about TIPS not having “deflation protection”, but that is really inaccurate framing. TIPS are guaranteed to keep their value in real dollars regardless of inflation or deflation. In the unlikely event of severe deflation TIPS simply get less of a windfall than would nominal bonds.

Exactly. I've read a lot about lack of deflation protection online outside of this forum as well. I think that is a very poor understanding of TIPS .
The only return that ever matters in investing is REAL return. Everything should be reported in those terms.

[indexfundfan]

My apologies if this has been asked before: what happens if the maturity of the treasury is on a non-business day? Do you earn any interest on the maturity date? Or do you gain access to the money on the prior business day? Or something else?

Assume the treasury is held at a broker, not at treasury direct. Thanks.

[FactualFran]

Need some help understanding a specific TIPS bond.

Cusip is 912828N71 . YTM 2.612, coupon 0.625, adjusted price 122.560. Maturity 1/15/2026.

If I buy $10,000, it will cost $12,256, correct? Let's say inflation remains constant until maturity. What has my $12K investment given me?

The bottom line price that you pay will also include interest that had accrued since the previous interest payment on 7/15/2023 ($10 rounded to the nearest dollar). You will receive interest payments every six months with the first one for 1/15/2024 and the last one for 1/15/2026. At maturity you will receive the maximum of the inflation-adjusted principal or the face value.

If bought today (with settlement date of 8/31/2023) and the inflation rate turns out to be a constant 0%, then each of the five future interest payments would be $40.12 and the maturity amount would be $12,839.30.

[Electron]

The Ladder Tool on the Vanguard Bond Platform has a feature that I had not noticed before. In addition to a New Ladder, you can select My Holdings Ladder. The tool will display your current holdings followed by a Presentation Overview as shown below.

Log in to your account and then navigate to the section where you trade bonds and CDs. Look for the tab labeled "My CD and Bond Tools".

The example below shows a sample T-Bill ladder along with a small position in a Treasury Note due 4-30-24.

The average yield to maturity is shown as 5.383% which is modestly higher than Vanguard Treasury Money Market fund.

The stated yields may not be accurate if the tool is used when the bond market is closed. There are several other tabs provided including Projected Payments and Cash flow. The accrued interest shown is for the Treasury Note.

I don't know why Yield to Worst is provided for Treasury Securities with no call provisions. It's possible they are showing the yield if the securities are sold today.

Code: Select all

Presentation Overview
Total principal 	$101,132.82
Total accrued interest 	$16.58
Total commission 	—
Total net money 	$101,149.40
First year cash flow 	$102,050.00
Second year cash flow 	$0.00
Total par value 	$102,000.00
Total securities in portfolio 	11
Average coupon 	0.049%
Average maturity 	0.17 years
Average modified duration 	0.16
Average price 	$99.15
Average yield to worst 	5.254%
Average yield to maturity 	5.383%
Average current yield 	0.050%

[#Cruncher]

... YTM 2.612, coupon 0.625, adjusted price 122.560. Maturity 1/15/2026.
If I buy $10,000, it will cost $12,256, correct? Let's say inflation remains constant until maturity. What has my $12K investment given me? (underline added)

You're referring to the 0-5/8% TIPS maturing 1/15/2026. That web page shows that if the settlement date is 8/31, the index ratio would be 1.28393. An unadjusted price of 95+117/256 would then correspond to the adjusted price of 122.560.

"Inflation remains constant" is ambiguous. Do you mean that the CPI remains constant or that the rate of change of the CPI remains constant? FactualFran has answered the former interpretation in this post. In the table below I show how the latter interpretation could be calculated. For illustration I assume a constant 1.5% change in the TIPS index ratio every 6 months (row 7). (According to this BLS web page the CPI rose slightly over 3% from July 2022 to July 2023.)

Code: Select all

Row                Col A        Col B   Formula in Column B
  2           Face value       10,000
  3           Settlement    8/31/2023
  4              Matures    1/15/2026
  5               Coupon       0.625%
  6                Price   95 117/256
  7  Assumed 6 mo inflat         1.5%
  8  Index ratio 8/31/23      1.28393
  9     Principal amount    12,839.30  =B2*B8
 10       Principal cost    12,256.01  =B9*(B6/100)
 11   Yield to mataurity       2.612%  =YIELD(B3,B4,B5,B6,100,2,1)
 12     Prev coupon date    7/15/2023  =COUPPCD(B3,B4,2,1)
 13     Next coupon date    1/15/2024  =COUPNCD(B3,B4,2,1)

Code: Select all

 14       Days in period          184  =B13-B12
 15   Days before settle           47  =B3-B12
 16    Days after settle          137  =B13-B3
 17  Number full periods            4  =2*(YEAR(B4)-YEAR(B13))+(MONTH(B4)-MONTH(B13))/6
 18    Avg days / period      182.946  =(B4-B3)/(B17+B16/B14)
 19     Accrued interest        10.25  =B9*(B5/2)*(B15/B14)
 20                        Nominal CF
 21            8/31/2023   -12,266.26  =-(B10+B19)
 22            1/15/2024        40.57  =(B$9*(B$5/2)+IF(A22=B$4,B$9,0))*(1+B$7)^(ROW(A22)-ROW(A$22)+B$16/B$14)
 23            7/15/2024        41.18   | | |
 24            1/15/2025        41.80   | | |
 25            7/15/2025        42.42   v v v
 26            1/15/2026    13,822.13  =(B$9*(B$5/2)+IF(A26=B$4,B$9,0))*(1+B$7)^(ROW(A26)-ROW(A$22)+B$16/B$14)

Code: Select all

 27       Nominal income     1,721.83  =SUM(B21:B26)
 28       Nominal return       5.651%  =2*((1+XIRR(B21:B26,A21:A26))^(B18/365)-1)
 29          Real return       2.612%  =2*((1+B28/2)/(1+B7)-1)

With this assumed 1.5% increase in the TIPS index ratio every six months, row 28 shows that you would have a nominal 5.651% return, calculated with the XIRR function adjusted to semi-annual compounding. But row 29 shows that on a real basis the return is 2.612%, the same as the yield-to-maturity calculated on row 11 with the YIELD function.

[Tom_T]

Need some help understanding a specific TIPS bond.

Cusip is 912828N71 . YTM 2.612, coupon 0.625, adjusted price 122.560. Maturity 1/15/2026.

If I buy $10,000, it will cost $12,256, correct? Let's say inflation remains constant until maturity. What has my $12K investment given me?

The bottom line price that you pay will also include interest that had accrued since the previous interest payment on 7/15/2023 ($10 rounded to the nearest dollar). You will receive interest payments every six months with the first one for 1/15/2024 and the last one for 1/15/2026. At maturity you will receive the maximum of the inflation-adjusted principal or the face value.

If bought today (with settlement date of 8/31/2023) and the inflation rate turns out to be a constant 0%, then each of the five future interest payments would be $40.12 and the maturity amount would be $12,839.30.

May I provide one more example? This one has a high adjusted price.

CUSIP = 912810FS2, matures 1/15/2026
YTM = 2.67
Adjusted price = 131.35
Coupon = 2.0

[FactualFran]

Need some help understanding a specific TIPS bond.

Cusip is 912828N71 . YTM 2.612, coupon 0.625, adjusted price 122.560. Maturity 1/15/2026.

If I buy $10,000, it will cost $12,256, correct? Let's say inflation remains constant until maturity. What has my $12K investment given me?

The bottom line price that you pay will also include interest that had accrued since the previous interest payment on 7/15/2023 ($10 rounded to the nearest dollar). You will receive interest payments every six months with the first one for 1/15/2024 and the last one for 1/15/2026. At maturity you will receive the maximum of the inflation-adjusted principal or the face value.

If bought today (with settlement date of 8/31/2023) and the inflation rate turns out to be a constant 0%, then each of the five future interest payments would be $40.12 and the maturity amount would be $12,839.30.

May I provide one more example? This one has a high adjusted price.

CUSIP = 912810FS2, matures 1/15/2026
YTM = 2.67
Adjusted price = 131.35
Coupon = 2.0

That one has the same maturity date as the one in your previous post. A difference is that it was originally issued with a term of 20 years rather than 10 years for the one in your previous post. For a more direct comparison with the results for the TIPS in the previous post, I'll treat the buy as having being made of the same day as the other TIPS (although the adjusted price would likely have been different on that day).

With a constant future inflation rate of zero, #Cruncher will likely post what the results will be for a constant inflation rate other than zero, a face value of $10,000 will have a redemption value of 15,370.90. Each semi-annual interest payment will be $153.71, rather than $40.12 with the other TIPS. The accrued interest in the bottom line price would be $39 rather than $10 (both rounded to the nearest dollar).

[Tom_T]

Need some help understanding a specific TIPS bond.

Cusip is 912828N71 . YTM 2.612, coupon 0.625, adjusted price 122.560. Maturity 1/15/2026.

If I buy $10,000, it will cost $12,256, correct? Let's say inflation remains constant until maturity. What has my $12K investment given me?

The bottom line price that you pay will also include interest that had accrued since the previous interest payment on 7/15/2023 ($10 rounded to the nearest dollar). You will receive interest payments every six months with the first one for 1/15/2024 and the last one for 1/15/2026. At maturity you will receive the maximum of the inflation-adjusted principal or the face value.

If bought today (with settlement date of 8/31/2023) and the inflation rate turns out to be a constant 0%, then each of the five future interest payments would be $40.12 and the maturity amount would be $12,839.30.

May I provide one more example? This one has a high adjusted price.

CUSIP = 912810FS2, matures 1/15/2026
YTM = 2.67
Adjusted price = 131.35
Coupon = 2.0

That one has the same maturity date as the one in your previous post. A difference is that it was originally issued with a term of 20 years rather than 10 years for the one in your previous post. For a more direct comparison with the results for the TIPS in the previous post, I'll treat the buy as having being made of the same day as the other TIPS (although the adjusted price would likely have been different on that day).

With a constant future inflation rate of zero, #Cruncher will likely post what the results will be for a constant inflation rate other than zero, a face value of $10,000 will have a redemption value of 15,370.90. Each semi-annual interest payment will be $153.71, rather than $40.12 with the other TIPS. The accrued interest in the bottom line price would be $39 rather than $10 (both rounded to the nearest dollar).

Thank you. Obviously I'm looking at TIPS for early 2026. It's starting to seep in.

[FactualFran]

May I provide one more example? This one has a high adjusted price.

CUSIP = 912810FS2, matures 1/15/2026
YTM = 2.67
Adjusted price = 131.35
Coupon = 2.0

Taking a closer look, those values are not consistent. The Adjusted price corresponding to the given YTM is 151.35.

[Tom_T]

May I provide one more example? This one has a high adjusted price.

CUSIP = 912810FS2, matures 1/15/2026
YTM = 2.67
Adjusted price = 131.35
Coupon = 2.0

Taking a closer look, those values are not consistent. The Adjusted price corresponding to the given YTM is 151.35.

I think that may have been a typo on my part.

Is there a tradeoff in buying a TIPS with a high adjusted price, or does it not matter? Assume tax deferred account.

[jeffyscott]

May I provide one more example? This one has a high adjusted price.

CUSIP = 912810FS2, matures 1/15/2026
YTM = 2.67
Adjusted price = 131.35
Coupon = 2.0

Taking a closer look, those values are not consistent. The Adjusted price corresponding to the given YTM is 151.35.

I think that may have been a typo on my part.

Is there a tradeoff in buying a TIPS with a high adjusted price, or does it not matter? Assume tax deferred account.

The accrued principle can fall to as low as $1000, but no lower, under sustained deflation. IMO, this is more of a theoretical difference than a real difference, especially in this case. One of the Jan 2026 TIPS has about 1537 in accrued principle and the other has about 1284. So in order for their to be a difference, there would have to be in excess of 22% deflation between now and Jan 2026.

For example were there to be 30% deflation, the $1284 adjusted principle would fall to $1000 at maturity, for a loss of about 22% in nominal value of the principle. The $1537 would fall to about $1076, for a 30% loss in nominal value of the principle (the higher coupon would partly offset the larger loss of principle).

[Tom_T]

May I provide one more example? This one has a high adjusted price.

CUSIP = 912810FS2, matures 1/15/2026
YTM = 2.67
Adjusted price = 131.35
Coupon = 2.0

Taking a closer look, those values are not consistent. The Adjusted price corresponding to the given YTM is 151.35.

I think that may have been a typo on my part.

Is there a tradeoff in buying a TIPS with a high adjusted price, or does it not matter? Assume tax deferred account.

The accrued principle can fall to as low as $1000, but no lower, under sustained deflation. IMO, this is more of a theoretical difference than a real difference, especially in this case. One of the Jan 2026 TIPS has about 1537 in accrued principle and the other has about 1284. So in order for their to be a difference, there would have to be in excess of 22% deflation between now and Jan 2026.

For example were there to be 30% deflation, the $1284 adjusted principle would fall to $1000 at maturity, for a loss of about 22% in nominal value of the principle. The $1537 would fall to about $1076, for a 30% loss in nominal value of the principle (the higher coupon would partly offset the larger loss of principle).

Thanks. I suspect that deflation is not an issue that will concern us.

[exodusing]

I had a tbill at Vanguard that matured on Thursday as well as interest due from other treasuries. On Wednesday I used part of the expected proceeds to purchase a treasury note. I should have been left with some money from the maturing principal and some interest. Let's say $1,100 in maturing principal and interest for illustration. This morning, my brokerage account showed $1,000 in the settlement fund and $100 credits, for the correct total. I tried to use all of these funds to purchase some mutual funds in another Vanguard account (an exchange). I could only use money in the settlement fund. I could use the full amount to make a purchase in the brokerage account (a buy), but that's not where I wanted the purchased funds to be.

I asked Vanguard why I couldn't use the full $1,100, since they should have gotten good funds from the treasury yesterday. The answer was the $100 should be in the settlement account later today. No explanation as to why the some went into settlement and some credits beyond that's what their systems do.

This makes little sense to me, but we shall see if the credited funds move into the settlement account.

I hope my recitation is clear.

[Doc]

Let's say $1,100 in maturing principal and interest for illustration. This morning, my brokerage account showed $1,000 in the settlement fund and $100 credits, for the correct total.

I belive that a treasury BILL pays back the face value at maturity. In your case you should get back $900 as capital and $100 in interest. (I'm assuming from your data that you paid $900 at purchase.)

(One of the bond gurus can correct me if I am wrong.)

[exodusing]

Let's say $1,100 in maturing principal and interest for illustration. This morning, my brokerage account showed $1,000 in the settlement fund and $100 credits, for the correct total.

I belive that a treasury BILL pays back the face value at maturity. In your case you should get back $900 as capital and $100 in interest. (I'm assuming from your data that you paid $900 at purchase.)

(One of the bond gurus can correct me if I am wrong.)

A tbill does pay back face value at maturity. Vanguard documents this as two transactions - $900 as capital and $100 interest. In my case there were three listed transactions, $900 capital, $100 interest from this tbill, $100 interest from other treasuries. (Numbers for illustration only.)

The main issue being that Vanguard should have gotten good funds yesterday for all three of these, which they appeared to admit. They should have put all of the funds into the settlement account, which they have not yet done.

[exodusing]

I'll add that the interest that's listed as a credit but was not yet put into the settlement account is from: U S Treasury Note Cpn 2.37500 % Mtd 2024-02-29 Dtd 2019-02-28

[Kevin M]

My apologies if this has been asked before: what happens if the maturity of the treasury is on a non-business day? Do you earn any interest on the maturity date? Or do you gain access to the money on the prior business day? Or something else?

Assume the treasury is held at a broker, not at treasury direct. Thanks.

You earn interest until the maturity date. If maturity is on a non-trading day, you don't earn anything for the days following maturity.

The proceeds from the matured T don't show up in your account until the trading day after maturity, or in the case of Vanguard, the day after that. However, you can place a buy order using the proceeds of the Treasury that will mature on a non-trading day on the trading day before the non-trading day. At Vanguard and Schwab, you can do this online. At Fidelity, you must call, unless you have a margin account, in which case you can do it online if you have sufficient margin. You will not be charged any margin interest as long as the buy settlement date is on or after the maturity date.

In the past I have seen slightly higher yields for issues that mature on a non-trading day, probably do compensate for not being able to earn interest on the matured proceeds for a day or more.

[exodusing]

I'll add that the interest that's listed as a credit but was not yet put into the settlement account is from: U S Treasury Note Cpn 2.37500 % Mtd 2024-02-29 Dtd 2019-02-28

The money never showed up in my settlement account. A phone rep was able to execute the desired transactions shortly before the market closed for the day.

It was noted that the ability to move money easily between a brokerage account and a mutual fund only account may or may not last.

There's still no good reason why interest paid by the treasury should not be in the settlement fund the trading day after the interest was paid.

[Doc]

There's still no good reason why interest paid by the treasury should not be in the settlement fund the trading day after the interest was paid.

A similar type situation happened to me several weeks ago at Schwab. (I think it was posted up thread.) But the "explanation" from the Schwab expert was that the Treasury does not always report the cash to an hour or more AFTER the start of trading on settlement day.

Hence the money may not show up in ones settlement account until after close of business that day even though it is there.

[exodusing]

There's still no good reason why interest paid by the treasury should not be in the settlement fund the trading day after the interest was paid.

A similar type situation happened to me several weeks ago at Schwab. (I think it was posted up thread.) But the "explanation" from the Schwab expert was that the Treasury does not always report the cash to an hour or more AFTER the start of trading on settlement day.

Hence the money may not show up in ones settlement account until after close of business that day even though it is there.

U S Treasury Note Cpn 2.37500 % Mtd 2024-02-29 Dtd 2019-02-28 pays interest on Thursday August 31. I was trying to use the funds near the end of the trading day on Friday Sept 1, which would seem more than enough time for the funds to show in my settlement account.

[Doc]

U S Treasury Note Cpn 2.37500 % Mtd 2024-02-29 Dtd 2019-02-28 pays interest on Thursday August 31. I was trying to use the funds near the end of the trading day on Friday Sept 1, which would seem more than enough time for the funds to show in my settlement account.

Two observations:

1) You are addressing Vanguard and I am addressing Schwab.

2) Normally(?) we would expect the Treasury to send the amount due whether interest or principle before start of business on the settlement date. According to Schwab they don't get the money until a hour or so AFTER start of business.

So neither broker would show the funds at start of business. Schwab apparently posts shortly after they receive the money but Vanguard doesn't report it until after close of business. I agree that one would think that both would post during business hours. But sith happens.

[exodusing]

U S Treasury Note Cpn 2.37500 % Mtd 2024-02-29 Dtd 2019-02-28 pays interest on Thursday August 31. I was trying to use the funds near the end of the trading day on Friday Sept 1, which would seem more than enough time for the funds to show in my settlement account.

Two observations:

1) You are addressing Vanguard and I am addressing Schwab.

2) Normally(?) we would expect the Treasury to send the amount due whether interest or principle before start of business on the settlement date. According to Schwab they don't get the money until a hour or so AFTER start of business.

So neither broker would show the funds at start of business. Schwab apparently posts shortly after they receive the money but Vanguard doesn't report it until after close of business. I agree that one would think that both would post during business hours. But sith happens.

Funds should have arrived sometime during the day on THURSDAY. The money was still not in the Vanguard settlement account on FRIDAY by the end of the trading day. That's the issue.

[Jaylat]

I recently ordered a “Schwab BondSource Fixed Income Report” for my Schwab FI portfolio. It has some good stuff, including a summary of YTM for each bond at purchase, schedules for bond maturity and duration, average YTM, etc.

However, the Report as well as Schwab's website and monthly statements are inaccurate in estimating future income for TIPS; they don't consider the Inflation Factor in determining the coupon payments. The calculations should be:

(Bond Face Amount) x (Inflation Factor) x (Coupon) = TIPS Interest Payment

Schwab uses only:
(Bond Face Amount) x (Coupon) = TIPS Interest Payment

For TIPS with lower Inflation Factors it's not such a big deal, but some are in the 1.3x to 2.0x range, so the income is understated by a significant amount. I use my own spreadsheet to calculate the actual TIPS income, but it’s a hassle to keep updating it. I’ve asked Schwab to address this issue, but from their lukewarm response I am doubtful much will happen.

Do other brokerages have this same problem? Or is Schwab the only one?

[Kevin M]

I recently ordered a “Schwab BondSource Fixed Income Report” for my Schwab FI portfolio. It has some good stuff, including a summary of YTM for each bond at purchase, schedules for bond maturity and duration, average YTM, etc.

How do you "order" this?

[jeffyscott]

I use my own spreadsheet to calculate the actual TIPS income, but it’s a hassle to keep updating it. I’ve asked Schwab to address this issue, but from their lukewarm response I am doubtful much will happen.

One way to simplify the updates would be to derive the current inflation factors from the current reference CPI, so that you only have to change one number to update all your TIPS.

What I do is I have the reference CPI at issuance for each of my TIPS in a column of the spreadsheet. The current reference CPI is in a single cell on the spreadsheet. Then by dividing the current reference CPI by reference CPI at issuance, I get the inflation factor for each TIPS. So to update all I need to change is that one figure, the current reference CPI.

[Kevin M]

I use my own spreadsheet to calculate the actual TIPS income, but it’s a hassle to keep updating it. I’ve asked Schwab to address this issue, but from their lukewarm response I am doubtful much will happen.

One way to simplify the updates would be to derive the current inflation factors from the current reference CPI, so that you only have to change one number to update all your TIPS.

What I do is I have the reference CPI at issuance for each of my TIPS in a column of the spreadsheet. The current reference CPI is in a single cell on the spreadsheet. Then by dividing the current reference CPI by reference CPI at issuance, I get the inflation factor for each TIPS. So to update all I need to change is that one figure, the current reference CPI.

[Kevin M]

Today I bought some TIPS at Schwab--my first TIPS purchases there since moving my accounts from VG and Fido to Schwab. As with most nominal Treasuries, the best prices/yields were for min qty 1, and the yields were a few basis points higher than what was available for my quantities at Fido.

I bought enough 7/15/2027 to reach my target for this maturity, and enough 10/15/2027 to get me to 70% of my target for this maturity.

I used the proceeds of my last credit union IRA CD (Andrews) that matured over the weekend. I had them overnight a check to Schwab, which they did on Tuesday (due to labor day holiday). It arrived at Schwab and was deposited to my account yesterday, but I didn't check before market close to see if it was available yesterday, so I invested it today, Thursday.

[Jaylat]

I recently ordered a “Schwab BondSource Fixed Income Report” for my Schwab FI portfolio. It has some good stuff, including a summary of YTM for each bond at purchase, schedules for bond maturity and duration, average YTM, etc.

How do you "order" this?

Like you, I had no idea this report existed. My account advisor told me about the report, which you can order for free from your Schwab Fixed Income specialist.

[Jaylat]

I use my own spreadsheet to calculate the actual TIPS income, but it’s a hassle to keep updating it. I’ve asked Schwab to address this issue, but from their lukewarm response I am doubtful much will happen.

One way to simplify the updates would be to derive the current inflation factors from the current reference CPI, so that you only have to change one number to update all your TIPS.

What I do is I have the reference CPI at issuance for each of my TIPS in a column of the spreadsheet. The current reference CPI is in a single cell on the spreadsheet. Then by dividing the current reference CPI by reference CPI at issuance, I get the inflation factor for each TIPS. So to update all I need to change is that one figure, the current reference CPI.

Great suggestion, thanks! Somebody should tell Schwab about this.

Now if only there were a way to automatically update TIPS prices like you can with stocks...

[Stubbie]

I use my own spreadsheet to calculate the actual TIPS income, but it’s a hassle to keep updating it. I’ve asked Schwab to address this issue, but from their lukewarm response I am doubtful much will happen.

One way to simplify the updates would be to derive the current inflation factors from the current reference CPI, so that you only have to change one number to update all your TIPS.

What I do is I have the reference CPI at issuance for each of my TIPS in a column of the spreadsheet. The current reference CPI is in a single cell on the spreadsheet. Then by dividing the current reference CPI by reference CPI at issuance, I get the inflation factor for each TIPS. So to update all I need to change is that one figure, the current reference CPI.

Great idea!
Thanks.

[questionbox]

Even after reading this thread, maybe especially after reading this thread, TIPS still make my head spin! I'm settled to buy TIPS only in tax-deferred IRA or 401k (taxes too complex for multiple TIPS holdings). Ignoring the prime issue of uncertain yield increase or decrease between Sep and Nov, what are the considerations which might make one favor participating in the 10 yr TIPS auction 9/14/23 as opposed to the 11/16/23 auction? Both are reopenings for 10 yr TIPS. Any additional considerations or factors to note which might make it advantageous (or disadvantageous) to wait for the next originating 10 yr TIPS auction in Jan 2024 (again, ignoring the possibility of yield changes)? Maybe there are no considerations or details to factor in picking re-opening versus originating auction?

[Kevin M]

Even after reading this thread, maybe especially after reading this thread, TIPS still make my head spin! I'm settled to buy TIPS only in tax-deferred IRA or 401k (taxes too complex for multiple TIPS holdings). Ignoring the prime issue of uncertain yield increase or decrease between Sep and Nov, what are the considerations which might make one favor participating in the 10 yr TIPS auction 9/14/23 as opposed to the 11/16/23 auction? Both are reopenings for 10 yr TIPS. Any additional considerations or factors to note which might make it advantageous (or disadvantageous) to wait for the next originating 10 yr TIPS auction in Jan 2024 (again, ignoring the possibility of yield changes)? Maybe there are no considerations or details to factor in picking re-opening versus originating auction?

If you want to own TIPS, why wait? Yields are decent now. I'm continuing to buy on secondary market, paying no attention to auctions.

If you want to buy at auction, buy at the first available auction. The next TIPS auction is scheduled for 9/21--the announcement is 9/14. This is a reopening of the 10y.

The next scheduled TIPS auction is Oct 19, a 5y TIPS.

The next scheduled 10y TIPS auction is 11/21 (announcement is 11/16), and as you say, it's another reopening.

[Kevin M]

I bought some nominal Treasuries today at Fidelity, and noticed that the best price was for min qty 1! It's probably a coincidence, but it was only a few weeks ago that I was explaining to a Fidelity fixed income regional manager, or something like that, how Schwab did this.

If this isn't just a fluke, but is a sign of the way things will be going forward at Fido, Schwab will have lost a big advantage over Fido. I'll be buying more Ts at Fido in the coming days and weeks, so will keep an eye on this.

[dfrohman]

I bought some nominal Treasuries today at Fidelity, and noticed that the best price was for min qty 1! It's probably a coincidence, but it was only a few weeks ago that I was explaining to a Fidelity fixed income regional manager, or something like that, how Schwab did this.

If this isn't just a fluke, but is a sign of the way things will be going forward at Fido, Schwab will have lost a big advantage over Fido. I'll be buying more Ts at Fido in the coming days and weeks, so will keep an eye on this.

I saw that at Fidelity today as well. I put in a small order, 7 bonds, and even though it was showing min qty of 1 or possibly 5, the trade was denied saying I was below the min quantity for the bid. I rechecked the min qty thinking I had selected the wrong bid but I had not. I re-submitted the trade and it went through on the second try.

[gmc2017]

I had the same experience at Fidelity this morning buying 25 TIPS at a minimum 5 price. After several resubmissions, the order was accepted and then cancelled.

[HM 7]

Yes, nominals would outperform TIPS in deflation because you are guaranteed a positive yield, but the upside is limited in deflation whareas the downside is limitless in inflation.
In my very extreme example above, if you had purchased nominals instead at 5% you would get $525K instead of $500K at the end of the year.... 5 more houses.

I often see posters fretting about TIPS not having “deflation protection”, but that is really inaccurate framing. TIPS are guaranteed to keep their value in real dollars regardless of inflation or deflation. In the unlikely event of severe deflation TIPS simply get less of a windfall than would nominal bonds.

Exactly. I've read a lot about lack of deflation protection online outside of this forum as well. I think that is a very poor understanding of TIPS .
The only return that ever matters in investing is REAL return. Everything should be reported in those terms.

If you buy TIPS on the secondary market, you're inheriting the original deflation floor. If you buy at a significant premium and the inflation index is high, I can see how you can lose a significant amount of (your) principal even though you would still keep up with Real returns. With nominals, you lose nothing. And yes I know deflation is rare and unlikely to be significant or prolonged.

[Drew31]

This may need to be its own thread, but I'm going to try this here first...

Is anyone buying individual LT TIPS in 401k Brokerage Link Accounts? I'm looking at buying some 2040 TIPS in my wife's account (Schwab), but thinking through any unforeseen complications.

Only issue I can think of is if she leaves and we do a rollover to an IRA, I'd have to sell the TIPS (gain or loss) at that time to do the rollover, but my thinking is I'd then just repurchase in the IRA - which is no different than what I'd have to do for any equities in the account. So the risk is the bid/ask spread and any appreciation during sale and repurchase.

[er999]

This may need to be its own thread, but I'm going to try this here first...

Is anyone buying individual LT TIPS in 401k Brokerage Link Accounts? I'm looking at buying some 2040 TIPS in my wife's account (Schwab), but thinking through any unforeseen complications.

Only issue I can think of is if she leaves and we do a rollover to an IRA, I'd have to sell the TIPS (gain or loss) at that time to do the rollover, but my thinking is I'd then just repurchase in the IRA - which is no different than what I'd have to do for any equities in the account. So the risk is the bid/ask spread and any appreciation during sale and repurchase.

Yes I bought individual tips through brokerage link at fidelity in my 401k, both new issue and secondary. Only issue to be aware of with secondary is oftentimes the order doesn’t go through and you have to resubmit a few minutes later. I think it is because they aren’t as liquid as a large etf like VTI. I thought I was doing something wrong at first but seems like that is normal for secondary tips.

New issue tips won’t show available until the announcement day and there’s usually a few days between the announcement day and auction day for you to put in your order.

[welderwannabe]

Yes I bought individual tips through brokerage link at fidelity in my 401k, both new issue and secondary. Only issue to be aware of with secondary is oftentimes the order doesn’t go through and you have to resubmit a few minutes later.

I've run into this. The default at Fidelity is the order go in as "fill or kill" limit orders. After a few mins, if they can't fill they cancel the order. This happens when the price moves between the time you were creating the order and the time you hit submit.

You can change it to a "Day" order, and it will give the day to process. I have better luck with this.

[Lyrrad]

Is anyone buying individual LT TIPS in 401k Brokerage Link Accounts? I'm looking at buying some 2040 TIPS in my wife's account (Schwab), but thinking through any unforeseen complications.

Only issue I can think of is if she leaves and we do a rollover to an IRA, I'd have to sell the TIPS (gain or loss) at that time to do the rollover, but my thinking is I'd then just repurchase in the IRA - which is no different than what I'd have to do for any equities in the account. So the risk is the bid/ask spread and any appreciation during sale and repurchase.

I plan to make future long term TIPS purchases in such an account since it transitioned to Schwab earlier this month. I plan to keep the funds in the 401k plan indefinitely. My plan currently allows one to roll over such assets in kind to an IRA if I need to for a small fee.

Schwab seems to have better secondary market prices and liquidity than Fidelity or Vanguard, so I'm hoping it's easier to buy them there.

[Drew31]

This may need to be its own thread, but I'm going to try this here first...

Is anyone buying individual LT TIPS in 401k Brokerage Link Accounts? I'm looking at buying some 2040 TIPS in my wife's account (Schwab), but thinking through any unforeseen complications.

Only issue I can think of is if she leaves and we do a rollover to an IRA, I'd have to sell the TIPS (gain or loss) at that time to do the rollover, but my thinking is I'd then just repurchase in the IRA - which is no different than what I'd have to do for any equities in the account. So the risk is the bid/ask spread and any appreciation during sale and repurchase.

Yes I bought individual tips through brokerage link at fidelity in my 401k, both new issue and secondary. Only issue to be aware of with secondary is oftentimes the order doesn’t go through and you have to resubmit a few minutes later. I think it is because they aren’t as liquid as a large etf like VTI. I thought I was doing something wrong at first but seems like that is normal for secondary tips.

New issue tips won’t show available until the announcement day and there’s usually a few days between the announcement day and auction day for you to put in your order.

Similar where I've run into this in Fidelity with my IRA. Persistence usually pays off when I run into this.

Is anyone buying individual LT TIPS in 401k Brokerage Link Accounts? I'm looking at buying some 2040 TIPS in my wife's account (Schwab), but thinking through any unforeseen complications.

Only issue I can think of is if she leaves and we do a rollover to an IRA, I'd have to sell the TIPS (gain or loss) at that time to do the rollover, but my thinking is I'd then just repurchase in the IRA - which is no different than what I'd have to do for any equities in the account. So the risk is the bid/ask spread and any appreciation during sale and repurchase.

I plan to make future long term TIPS purchases in such an account since it transitioned to Schwab earlier this month. I plan to keep the funds in the 401k plan indefinitely. My plan currently allows one to roll over such assets in kind to an IRA if I need to for a small fee.

Schwab seems to have better secondary market prices and liquidity than Fidelity or Vanguard, so I'm hoping it's easier to buy them there.

I'm similar where now have Schwab access with the transition. I've been filling up space with LT TIPS in our traditional IRAs for now, but somewhat soon will run out of space there and looking at the 401k brokerage link with Schwab as next option. Good to see you're able to do this. Unlike you though, I know I'd rollover to a IRA vs. leaving in 401k permanently if wife left company so anticipating how having the individual TIPS would impact that process at that time.

[BBBob]

Thanks again, Kevin and others, for this continued TIPS education. I have a couple of embarrassingly basic questions as i begin to purchase individual TIPS.

First, how do you choose the rungs to fill first within your chosen range? Do you start with the earliest, the latest, those with the best yield, those with the lowest inflation factors, etc? And why?

Second, do you consider yields to be your primary parameter, or low inflation factors?

Thanks for the hand-holding.
Bob

[Drew31]

Thanks again, Kevin and others, for this continued TIPS education. I have a couple of embarrassingly basic questions as i begin to purchase individual TIPS.

First, how do you choose the rungs to fill first within your chosen range? Do you start with the earliest, the latest, those with the best yield, those with the lowest inflation factors, etc? And why?

Second, do you consider yields to be your primary parameter, or low inflation factors?

Thanks for the hand-holding.
Bob

I'll share my approach should it help and I'm sure others can help too. Keep in mind, I just started buying individual TIPS in April, so keep that perspective.

My goal is to fill out TIPS between 2041 and 2050 which gets me 60 to 70. Currently estimates show my wife and I SS should cover most of our needs past 70, so basically I'm just trying to fill the bridge.

One of your questions is around which years to target. I don't think there is a right/wrong answer but my approach is certain years in that window I know I'll need more. (For example, once my wife begins claiming SS, there is additional income we'll have.) So I will kind of prioritize those years first. So when I started buying I bought those years first/

Regarding yields/inflation factors...GENERALLY, most of the yields in that window are within a few basis points of one another. Yes, those in the middle 2040's right now do yield a bit more but generally I've not focused too much on yields between the years. The inflation factors I do pay some attention. For instance, the 2041 TIPS I've ruled out due to the higher inflation factor and higher coupon. So that year I will skip and worry about it in the future.

[Kevin M]

Yes I bought individual tips through brokerage link at fidelity in my 401k, both new issue and secondary. Only issue to be aware of with secondary is oftentimes the order doesn’t go through and you have to resubmit a few minutes later.

I've run into this. The default at Fidelity is the order go in as "fill or kill" limit orders. After a few mins, if they can't fill they cancel the order. This happens when the price moves between the time you were creating the order and the time you hit submit.

You can change it to a "Day" order, and it will give the day to process. I have better luck with this.

I am unable to change from fill or kill to day for time in force, nor have I ever been able to in recent years. When I hover over "Day", I get a black circle with an X through it. I tried to take a delayed snip of it, but the circle with x goes away when the snip activates.

[Kevin M]

Thanks again, Kevin and others, for this continued TIPS education. I have a couple of embarrassingly basic questions as i begin to purchase individual TIPS.

First, how do you choose the rungs to fill first within your chosen range? Do you start with the earliest, the latest, those with the best yield, those with the lowest inflation factors, etc? And why?

Second, do you consider yields to be your primary parameter, or low inflation factors?

Thanks for the hand-holding.
Bob

I can't answer this for me personally, because I buy every maturity out to the longest maturity in my "ladder".

Any variations in yield are mostly due to seasonality, so I wouldn't pay much attention to that if maturities are within a few months of each other. For maturities further apart, the yield curve will determine the yields. Currently you get higher yields for shorter maturities, since the yield curve is inverted.

If choosing between similar maturities, or the same maturity (as for Jan in some years), I'd choose the lowest coupon, since that reduces coupon reinvestment risk. The closer to zero-coupon, the more certain your return.

Although I don't consider net deflation over an extended period much of a risk, choosing issues with lower index ratios (inflation factors) provides more upside in the case of net deflation over the holding period, so sure, why not, if yields are similar. Again, for similar maturities, seasonally-adjusted yields will be similar, so index ratio might trump yield here. However, there might be slightly more demand for lower IRs, so slightly higher price and lower yield could be associated with these too. I don't think it accounts for much price/yield difference though, once adjusted for seasonality.

[qatman]

Thanks again, Kevin and others, for this continued TIPS education. I have a couple of embarrassingly basic questions as i begin to purchase individual TIPS.

First, how do you choose the rungs to fill first within your chosen range? Do you start with the earliest, the latest, those with the best yield, those with the lowest inflation factors, etc? And why?

Second, do you consider yields to be your primary parameter, or low inflation factors?

Thanks for the hand-holding.
Bob

I have started filling in a ladder based on TIPS availability, urgency of need, and yield in that order. I have a bit of a composite situation in that I need

1x each year 2035-2039 (I am retired, wife is working)
2.5x each year 2040-2041 (both retired, no SS)
1x each year thereafter (supplemental for SS)

I started with 2040-2041 (not quite done yet, filling the rest over the next 2-3 years from SIMPLE IRA) because those TIPS are available and we plan to have no other income those years. Since the 2035-2039 TIPS are not currently available, I tentatively plan to start filling in 2042-2053 based on yield (source=retirement accounts), and then buy the 10-year TIPS in taxable starting from 2025-2029 yearly to fill in 2035-2039.

To be honest it is not entirely set in stone and will depend somewhat on cash needs, but I like the idea of having the guaranteed spending available each year. Also to note, I am excluding all interest from the calculations, so that each year the matured bond will provide the full spending amount. Then any interest along the way will be available for reinvestment in stocks/etc. or spending as desired. That just feels right to me as an added buffer.

[BBBob]

Thank you Qatman, Kevin and Drew. You have really helped me think this through and I appreciate it. For some reason, this is harder for me than any of the other investment phases I have been through.
Bob

[RyeBourbon]

This may need to be its own thread, but I'm going to try this here first...

Is anyone buying individual LT TIPS in 401k Brokerage Link Accounts? I'm looking at buying some 2040 TIPS in my wife's account (Schwab), but thinking through any unforeseen complications.

Only issue I can think of is if she leaves and we do a rollover to an IRA, I'd have to sell the TIPS (gain or loss) at that time to do the rollover, but my thinking is I'd then just repurchase in the IRA - which is no different than what I'd have to do for any equities in the account. So the risk is the bid/ask spread and any appreciation during sale and repurchase.

You should verify that you can buy TIPS through the Brokerage Link. I had the same idea for my 401k at Fidelity, but the only eligible securities are mutual funds and ETFs. I can't even invest in individual stocks. It seems to be a limitation of the specific plan, so you're probably good, but I would verify it before you take any actions dependent on that strategy.

"Through your BrokerageLink account, you have the ability to
invest in Fidelity mutual funds and non-Fidelity mutual funds
available through Fidelity FundsNetwork®, and
exchange-traded funds (ETFs)."

[Drew31]

This may need to be its own thread, but I'm going to try this here first...

Is anyone buying individual LT TIPS in 401k Brokerage Link Accounts? I'm looking at buying some 2040 TIPS in my wife's account (Schwab), but thinking through any unforeseen complications.

Only issue I can think of is if she leaves and we do a rollover to an IRA, I'd have to sell the TIPS (gain or loss) at that time to do the rollover, but my thinking is I'd then just repurchase in the IRA - which is no different than what I'd have to do for any equities in the account. So the risk is the bid/ask spread and any appreciation during sale and repurchase.

You should verify that you can buy TIPS through the Brokerage Link. I had the same idea for my 401k at Fidelity, but the only eligible securities are mutual funds and ETFs. I can't even invest in individual stocks. It seems to be a limitation of the specific plan, so you're probably good, but I would verify it before you take any actions dependent on that strategy.

"Through your BrokerageLink account, you have the ability to
invest in Fidelity mutual funds and non-Fidelity mutual funds
available through Fidelity FundsNetwork®, and
exchange-traded funds (ETFs)."

This is good point. I’ve kind of made the assumption I can but not actually verified I can so that would be a necessary step that make my entire discussion moot. Been in the brainstorming stage up to now.